Tuesday, July 7, 2009

What Makes a Depression Great Pt. II: The Roosevelt Myth

If Herbert Hoover's policies ground the apple cart that was the U.S. economy to a screeching halt, Franklin Delano Roosevelt's policies tipped the cart over.

Instead of adopting the policies of his predecessors--which were largely no policies at all--and letting the economic downturn correct itself, FDR sought the opportunity to make for himself a legacy that would leave ruin in its wake and set a dangerous precedent that we're seeing bloom into full effect today with Barack Obama's economic policies.

The New Deal had more than seven years to pull our nation's economy out of the rut that it remained stuck in. Historically economic depressions didn't last that long to begin with; most downturns lasted around two years and none more than five. It goes to show that historians don't seem terribly well-versed in economic study and those who are, such as Burton Folsom Jr., Gene Smiley, or Jim Powell, seem suspiciously absent from the textbooks in public schools. History is written by the winners indeed!

But enough speculation, let's take a look at some facts: While unemployment was at its highest when Roosevelt took office, unemployment numbers stayed in the double-digits all the way into the 1940's and even jumped from 14% to 18% in 1938, five years after Roosevelt's New Deal had gone into effect. The last economic depression prior to that, in 1921, unemployment was again in the double digits at 11.7% but had dropped to a remarkable 2.4% by 1923. There apparently was no need for a New Deal then, right?

So what kept unemployment so high during Roosevelt's administration? Apologists will claim that without the New Deal unemployment would have been much worse but one has to remember the Great Depression was a global catastrophe and yet the United States suffered the longest and hardest out of all other countries. Looking just at our northerly neighbors in Canada one can see that their unemployment numbers nearly matched the United States between 1930 and 1931 (8.9% for the U.S. vs. 9.1% for Canada) whereafter the United States would outpace Canada for the remainder of the Depression (The U.S. peaked at 24.9% and Canada peaked at 19.3%) and Canada would end up recovering quicker, it's unemployment numbers reaching a normal level by the 1940's at 4.4% while the U.S. still floundered at nearly 10%.

One of the biggest contributors to unemployment was FDR adopting Herbert Hoover's wage controls. Even as prices were dropping in the economy, the government was forcing firms to increase wages. When you have to pay workers a hefty sum and you're not making any money, the demand for labor drops considerably. If, immediately after taking office, FDR had allowed wages to adjust freely according to market value, unemployment would have tapered off and started dropping as resources and labor moved from failing businesses to sustainable ones. Instead FDR used the might of the Federal government to enact policies (such as the National Industrial Recovery Act and the National Labor Relations Act) that forced firms to raise wages and prices and limit competition--in effect creating monopolies. Small businesses couldn't survive because they couldn't undercut the prices of bigger corporations who then used their government-sanctioned cartel status to raise their own prices.

Essentially what happened is that a minimum price had to be charged for any good. If you were a small business your operations were run into the ground and then large corporations, now lacking any sort of competition, could charge whatever they wanted for goods and they most certainly didn't price them cheaply. In a free market such things do not happen because while corporations still want to make large sums of money, competition forces them to behave.

Forcing wages to be high has the same effect. By using the Wagner Act to give crippling power to labor unions, wages were forced up, union membership doubled, strike days doubled, and unemployment spiked. Firms weren't going to hire more workers when they were forced to pay the workers more than they were worth, especially when no one was buying any of their products because the prices had to be raised to cover the cost of the labor.

So with all this meddling in the markets another after effect of these policies was "regime uncertainty". Essentially this meant that private investors were scared away from investing their money because they remained unsure of the security of their property rights or their ability to even keep the returns on their investments. This form of "capital strike" slows recovery efforts in the economy because businesses won't have any means to invest in their own machinery or maintenance costs. In fact, investment dollars ran into the red to the tune of

-18.3 billion dollars (and that's in 1930's dollars). Yes, that's a minus sign in front of that figure! It wasn't until Roosevelt forced all the "New-Dealers" out of his administration on the onset of World War II and brought private industry onboard, filling his war administration with capitalists, that private investment started making a comeback.

As we can see from just a few examples in a long laundry list of policies that FDR put into effect, trying to prop up failing businesses, cutting off competition, and forcing high wages did nothing but exacerbate the length and severity of the Great Depression. It truly made what would have been just another plain ol' depression into a great one. And as I will explain in the next installments, what is going on in the economy now is not too far removed. Stay tuned!